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An FHA repair escrow allows a borrower to purchase a home that needs repairs using a mortgage. Lenders typically will not issue a loan for a home that includes funds for repairs. The FHA, or Federal Housing Administration, created a repair escrow program for mortgages designed to buy and renovate a property at the same time. The repair funds are put into a separate account and used as needed while the work gets done.

Repair and Escrow Limits

The house the repair escrow is for must not need more than $35,000 in exterior or interior repairs, and the repairs must be started within 90 days of the loan finalization and completed within one year, according to the U.S. Department of Housing and Urban Development (HUD). The 90-day period is extended, at the discretion of HUD, for homes that need exterior repairs but are in an area experiencing inclement weather conditions. If HUD or a lender owns the house, an amount equal to 110 percent of the repair estimation goes into the escrow. For other properties, the maximum escrow amount is 150 percent of the repair estimates.

Loan Documentation Requirements

HUD requires the loan underwriter to receive a specific set of documents before the loan closing to establish a repair escrow. Two bids from licensed contractors which line itemize all repairs and the cost for each are needed, as well as a copy of the contractor's license and a report from an FHA inspector detailing the work that is necessary.

The FHA appraiser and loan underwriter determine the minimum escrow amount based on the cost of repairs and a 10 percent contingency for unforeseen overage charges. The party responsible for the deposit into the account – the buyer or the seller – must be identified by the underwriter on the escrow documents. Once the work is complete, the lender must receive an inspection report certifying the repair and along with any open invoices for the work for payment.

Excluded Repairs

Repair escrows are not allowed for certain types of work, even if the repair expense is under $5,000. Any work that is necessary for the home to be habitable is not permitted, because the home must be habitable for the initial loan to be approved. Roof, foundation and repairs to the home's basic structure cannot be included in a repair escrow, as well as a system for electricity, plumbing or the delivery of heating fuel, per HUD.

About the Author

Anna Assad began writing professionally in 1999 and has published several legal articles for various websites. She has an extensive real estate and criminal legal background. She also tutored in English for nearly eight years, attended Buffalo State College for paralegal studies and accounting, and minored in English literature, receiving a Bachelor of Arts.